More Evidence of a Broken Patent System

The patent system is broken. We’ve been talking about it for years, and we just rolled out a new site (defendinnovation.org) to do something about it, where we hope you’ll join us in coming up with solutions that make sense for innovation.

Now we've got some new developments that further prove just how flawed the modern software patent system is:

First, today we saw a new report confirming what we already knew: patent trolls are costing the economy serious money (to the tune of $29 billion in 2011 alone!) and they disproportionately harm small businesses. The paper, by James Bessen and Michael Meurer (who also wrote the important book, Patent Failure), combs through the data and concludes:

The rapid growth and high cost of NPE [non-practicing entities, or trolls] litigation documented here should set off an alarm warning policy makers that the patent system still significant reform to make it a truly effective system for promoting innovation.

The paper drew some dire conclusions about the cost of troll suits, such as:

Trolls bring suits involving software patents 62 percent of the time; when those suits involve patents that have been litigated more than once, they concern software 94 percent of the time.

When trolls sue, small companies pay more in direct litigation costs than their larger counterparts.

Defendants' costs are more than just for lawyers and litigation, they include "diversion of management or engineering resources, delays in new product introductions and improvements, loss or delay of revenue, and credit constraints."

The threat of troll litigation causes companies to reduce their R&D budgets in order to afford high legal costs.

Perhaps most troubling, the paper points out that trolls "may skew the research agenda of small firms away from disruptive technologies and toward mainstream technology and associated patents that can be asserted against big incumbents. Even worse, small firms are encouraged to divert investment from genuine invention toward simply obtaining broad and vague patents that might one day lead to a credible, if weak, lawsuit."

Last week also saw an important ruling from Judge Richard Posner in a case between Apple and Motorola. The case started as a run-of-the-mill patent mess between the two parties, but Judge Posner used the opportunity to express some of his displeasure with the patent system (the influential judge had already publicly spoken out against the patent system and called it "chaos" during the hearings). After more than a year of litigation, Judge Posner threw the parties out of court, essentially faulting them for not being able to show how each was damaged by the other’s alleged patent infringement.

This case highlights some of the worst problems we’ve seen in litigation concerning software patents. The first is a patent owner’s attempts to extract millions of dollars in damages or shut down entire products for infringing only one patent that covers a mere fraction of the defendant’s product (check out proposal #6 at defendinnovation.org). In admonishing Apple, Judge Posner rightly pointed out that not only is this practice absurd, but it can harm consumers who rely on the products at issue.

The second important issue involves a party's ability to enforce its patents that cover industry standards. Here, Motorola asserted that Apple infringed a patent that covered communications between cell phones and cell towers (no, we're not kidding, and yes, that would cover almost every cell phone). Because this is what's called a "standard essential patent," Motorola agreed to license it on "fair, reasonable, and nondiscriminatory terms" (FRAND) to anyone who needs to use it. In other words, Motorola cannot use its patent to stop other cell phone companies from selling phones that actually make calls (so long as those companies are willing to pay for a "reasonable" license). Frankly, it would be better if this technology were free to all, but, given the current state of affairs, we're at least glad to see Judge Posner reaffirm this important principle.

The Bessen and Meurer paper and Judge Posner's ruling provide further evidence of what we already know: the patent system needs serious help. Software patents—and the cottage industry of litigation and licensing surrounding them—have created an environment that threatens businesses, consumers, and, worst of all, innovation. We're glad to see more sanity in the debate as people talk about what the real problems are and what we can do to fix them—whether it be implementing the proposals at defendinnovation.org or even abolishing software patents altogether. We hope you'll join the conversation at defendinnovation.org and tell us what you think, too.

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